Banger-nomics: who buys a new car?

The exciting news in the Cookson household is that Mrs Cookson is pregnant. This has prompted some rather scary trips to Mothercare, Mamas and Papas and John Lewis so far. It has also prompted a trip to the car showroom as the realization of schlepping all of this child-related banter around the country to visit our family and paying £80 each to Sir Richard for the privilege dawned upon us.

Living in London with a fantastic public transport network and being able to cycle the three miles to work has meant we haven’t had need of a car for a long time. The last car I owned was a short-wheel based 1983 Land Rover Defender.

Heading into the showroom it’s easy to be impressed by the shiny toys and salesman’s offers: low rates of finance, dealer deposit contributions, fives years of free servicing, lifetime warranties and alike. But the economics of new cars just don’t stack up; cars are depreciating assets and much of that depreciation happens in the first few months and years of ownership.

Let’s take an example – the Saab 93 Sports Wagon (chosen because it was the first advert on What Car?) – yours for a little over £30,000 according to What Car? But beware it’ll only be worth £9,241 after three years, losing 70 percent of its value. To add insult to injury, many people finance their cars. Let’s assume you’ve got a deposit of 20 percent and can get the market’s lowest rate of 6.5 percent. Your new Saab will cost you about £35,000.

But wait, as an economist I believe the true cost of that car is the opportunity cost: the next best alternative use of that money. Being conservative let’s say you invest your £6,000 deposit plus the £805 a month repayments into a low-yielding product at five percent per annum. After three years this is worth over £38,000. And we haven’t even considered the actual running cost including tax, insurance, maintenance and fuel.

Now please don’t start commenting that you got a particularly great discount on the list price, negotiated an inflated price for your part-exchange or extracted Bank of England interest rates for the finance. My point is more general. And don’t even start talking about balloon payments where effectively you’re simply financing the depreciation!

So what am I going to do? I’m going to head to the auctions and buy myself a three-year old, ex-fleet oil burner for a few thousand and pay cash. Yes it may need more maintenance, but I could throw one of these away each year and still lose less money than on a new car.

Last year just over two million new cars were registered in the UK and approximately half of these were sold to private individuals. So I’m clearly missing something. Jeremy Clarkson would probably say “a heart.”

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